So many times people who are good with money are labelled as “cheap”. It is true that cheap people exist who do not part with their money no matter how much benefit a particular transaction will bring. Frugal people, on the other hand, base the decision on spending on the utility.
Being cheap involves an emotional reaction to money whereas being frugal involves planning and rationality.
EMOTIONAL AND RATIONAL REACTION TO MONEY
Be honest. What is your reaction to a “SALE” or “X% off” sign on things you do not have any plan to buy?
Do you end up buying the things on sale even if you do not need it?
Take another situation. You are at a shop buying something which you are going to use regularly. You have two options. The second option is 50% pricier than the first option but from past experience, you know that it will last twice as long as the first option. Apart from that, it also looks more presentable.
Do you feel pain paying the 50% premium?
Do you feel that it is better to buy the cheaper one “for the time being”?
The above situations show how we react emotionally to expenses. Unfortunately, people who end up buying things they do not need on “SALE” also buy the cheaper option.
Let us take another situation. You just got your first salary or a handsome bonus. While coming back you see an expensive gadget or a piece of jewellery which you are not sure you will use. But, we often end up buying such expensive things which we will never use.
So, what is the rational approach?
The first requirement is knowing what you need and what you are going to use. I am not saying that you start thinking about whether you need something or not when you see the “Sale” sign. I am saying that you have a clear idea about the things you need and use and only buy things you are going to use. The “sale” is a price opportunity and it should not influence what you buy or how many you buy but at what price you buy it.
So, a frugal person knows what to buy based on the expected utility of such items. She pays a premium when she expects to receive higher utility and avoids paying a premium when no utility is expected from such a premium.
Being frugal is not about buying low-quality items or not having any aspirations. It is about evaluating the utility and paying the price for the utility. It is about planning.
One vital requirement to become frugal is understanding utility.
The most important nature of utility is that it is totally personal. You only can decide what is of higher and lower utility to you. The utility of Rs. 100 at the hands of a homeless is much more than in the hands of people reading this.
Another important nature of utility is that it is multi-faceted. We often get confined to direct economic benefit or economic utility ignoring the other factors which may have a greater impact on our wealth in the long term. So, what are the different kinds of utilities?
1. Economic Utility
This is straight-forward money made or saved. For example, buying a house will save rent expenses.
2. Convenience Utility
Utility from saved time and /or saved physical exertion. For example, owning a vehicle may not only save waiting time but also save the physical discomfort of public transport.
3. Social Utility
Utility from increased social capital. Consider that you joined a new organisation and you noticed that people here wear a specific brand of clothes which is a little expensive.
Investing in the more expensive clothing will help you fit in and grow in the organisation.
4. Health Utility
Utility from being healthy. In India going to the gym is often considered as a luxury. But, given the long term savings from health care costs and loss of productivity that regular exercise can save us from, it is a prudent investment. Same goes with choosing nutritious food options.
5. Emotional and Safety Utility
Certain things make us emotionally secure. Ignoring the emotional aspect may lead to loss of productivity. Also, feeling safe helps us to be more productive.
SO, HOW TO BE FRUGAL?
The first step is deciding and planning on your lifestyle. Decide what kind of accommodation, clothing, utilities maximize the utilities in your case mentioned above.
One example is deciding on the style of clothing you are most comfortable (based on appearance, quality, price etc. ) with. Then decide how many such apparels you actually use and how many you should own at any point in time. Make a list of such item you should have in your wardrobe.
Now, build your wardrobe slowly. Take advantage of “sale” and “discount” when you can.
The key is not to be impulsive nor scared of spending money but to have a plan.